1 LENDING RESTRICTIONS

1.1 In this jurisdiction, is there any restriction or requirement for a licence in connection with:

(a) making loans to a corporate entity?

There is no general statutory restriction or requirement for a person to have a licence to provide a loan to a corporate entity. However, if the loan also involves the provision of a financial product by the lender (such as a derivative) they may need to hold an Australian Financial Services License (“AFSL”) under Chapter 7 of the Corporations Act 2001 (Cth) (“Corporations Act”).

Entities that provide loans to corporate entities may also be required to register under some Australian legislation. For example, the Financial Sector (Collection of Data) Act 2001 (Cth) (“FSCOD Act”) requires certain corporations to register with the Australian Prudential Regulation Authority (“APRA”) (including where the sole or principal business activities in Australia of the corporation are the borrowing of money and the provision of finance).

(b) making loans to an individual person?

There is a statutory requirement for a person to hold an Australian Credit Licence where the credit provided to a person falls within the scope of the National Consumer Credit Protection Act 2009 (Cth) (including the National Credit Code) (“Credit Act”). The Credit Act will apply where credit is provided to an individual:

  • for personal, domestic or household purposes; or
  • to purchase, renovate or improve residential property for investment purposes; or
  • to refinance credit that has been provided to purchase, renovate or improve residential property for investment purposes.

Chapter 7 of the Corporations Act also requires a lender to hold an AFSL in order to issue a margin lending facility to an individual (or to provide any other financial product in connection with the loan).

Entities that provide loans to individuals may also be required to register under some Australian legislation.

(c) accepting the issue of a note or bond from a corporate issuer?

There is no statutory restriction or requirement for a licence.

(d) accepting a guarantee or security for a loan to an entity or person outside that jurisdiction?

There is no statutory restriction or requirement for a licence.

2 GUARANTEES

2.1 What legal restrictions exist on the ability of a company to give guarantees in relation to the obligations of:

(a) a subsidiary company

Financial assistance: A company registered in Australia can only provide financial assistance to a person to purchase shares in the company, or the shares of the company’s holding company (even if that holding company is incorporated outside of Australia), if:

  • that assistance does not materially prejudice the company or its shareholders, or the company’s ability to pay its shareholders (section 260A(a) of the Corporations Act);
  • that assistance is approved by shareholders under a process known as a “whitewash” (section 260B of the Corporations Act); or
  • there is a special exemption available under the section 260C of the Corporations Act (these are rarely available in a typical acquisition financing transaction).

If a financial assistance issue arises on a transaction, parties typically undertake a whitewash (all domestic banks would not lend on the basis of relying on the “no material prejudice” exception other than in very limited circumstances). The whitewash is a prescriptive process, which includes the passing of a resolution at a general meeting of the company giving the financial assistance. The resolution must be either:

  1. a special shareholders’ resolution where the person acquiring the shares (or its associates) cannot vote; or
  2. a resolution by all of the ordinary shareholders.

If immediately after the acquisition the company will be a subsidiary of a listed domestic company, the financial assistance must also be approved by a special resolution passed at a general meeting of that listed domestic company.

In addition, the financial assistance must be approved by a special resolution passed at a general meeting of the company to become the holding company, if immediately after the acquisition the company will have a holding company that both:

  1. is a domestic company but not listed; and
  2. is not itself a subsidiary of a domestic company.

A number of documents need to be lodged with the Australian Securities and Investments Commission (“ASIC”). The order of events under a whitewash must be followed. After the shareholders’ resolutions have been lodged with ASIC there is a 14-day statutory waiting period before financial assistance may be provided. Any special resolution passed must be lodged with ASIC by the company, listed domestic company or holding company within 14 days after it is passed.

Corporate benefit: Directors of Australian companies have duties under statute and common law to act in good faith, in the company’s best interests, and for a proper purpose. When determining if the transaction is sufficiently beneficial to the company, both direct benefits (such as the company’s ability to use the financing facility) and indirect benefits (for example, if the company requires the ongoing support of other companies within the group) can be considered. Importantly, each company must derive sufficient benefit itself when entering into a finance transaction. It is not sufficient that the benefit is derived by the corporate group (of which the company is a member) as a whole or by other members of its corporate group. However, if section 187 of the Corporations Act is specifically incorporated into the constitution of a company, a director can take into account what is in the best interests of the holding company in determining whether there is corporate benefit to the subsidiary (provided the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director’s act).

Related party benefits: A public company, or an entity that the public company controls, cannot give a financial benefit to a related party of the public company unless:

  • the public company or entity obtains the approval of the public company’s members in accordance with the provisions of the Corporations Act and the public company gives the benefit within 15 months after the member approval; or
  • the giving of the financial benefit falls within defined exceptions set out in the Corporations Act. An exception includes where the financial benefit is given on arm’s length.

(b) a sister company (connected through a parent)

Similar restrictions that apply to subsidiaries also apply to a sister company.

(c) a direct or indirect parent or holding company

Similar restrictions that apply to subsidiaries also apply to a direct or indirect parent or a holding company.

(d) a third party

Similar to above.

(e) An individual

The Consumer Credit Code specifies certain formalities for guarantees by natural persons in respect of certain credit contracts.

Also, if the company is a public company a loan to a director would constitute the giving of a related party benefit (for further restrictions on related party benefits, see above).

2.2 What is the hardening period for a guarantee?

The Corporations Act contains various avoidance provisions, with the fundamental aim of preventing the unjust enrichment of particular parties at the expense of all creditors. Each avoidance provision has a different hardening period.

Each regime is set out below:

(a) Insolvent Transactions

Under section 588FC of the Corporations Act, insolvent transactions may be voidable if certain conditions are met. An insolvent transaction is where an unfair preference is given by the company or an uncommercial transaction is entered into by the company, and:

  • the company was insolvent when the transaction was entered into or when something was done or not done for the purpose of effecting the transaction; or
  • the company becomes insolvent because of, or because of matters including, the entering into the transaction or a person doing or not doing something for the purpose of effecting the transaction.

Under section 588FA of the Corporations Act, a transaction will be an unfair preference if, and only

  • the company and the creditor are parties to the transaction (even if someone else is also a party); and
  • the transaction results in the creditor receiving from the company, in respect of an unsecured debt, more than the creditor would receive from the company in respect of the debt if the transaction were set aside and the creditor were to prove for the debt in a winding up.

An unfair preference will be voidable if:

  • the transaction was entered into at a time when the company was insolvent (or it became insolvent as a result of the transaction), and
  • the transaction was entered into 6 months (or 4 years in the case of related companies) before the day on which the order for the company to be wound up was made (“Relation-back day”) or after that day but before the winding up commenced.

(b) Uncommercial Transactions

Under section 588FB of the Corporations Act, a transaction will be an uncommercial transaction if it may be expected that a reasonable person in the company’s circumstances would not have entered into the transaction, having regard to:

  • the benefits (if any) to the company of entering into the transaction; and
  • the detriment to the company of entering into the transaction; and
  • the respective benefits to other parties to the transaction of entering into it; and
  • any other relevant matter.

An uncommercial transaction will be voidable if:

  • the transaction was entered into at a time when the company was insolvent (or it became insolvent as a result of the transaction), and
  • the transaction was entered into 6 months (or 4 years in the case of related companies) before the Relation-back day or after that day but before the winding up commenced.

(c) Unreasonable Director Related Transaction

Under section 588FDA of the Corporations Act, a transaction will be an unreasonable director-related transaction if:

  • the transaction involves payments, dispositions, issue of securities or incurrence of obligation to make such a payment, disposition or issue; and
  • the payment, disposition or issue is to, or is to be made to, a director of the company or close associate of a director (or person on their behalf); and
  • a reasonable person in the company’s circumstances would not have entered into the transaction.

An unreasonable director-related transaction will be voidable if the transaction was entered into 4 years before the Relation-back day or after that day but before the winding up commenced.

There is no need to prove insolvency.

(d) Consequences of voidable transactions

Under section 588FF of the Corporations Act, a wide range of orders can be made by the Court, including:

  • an order directing a payment of money;
  • an order directing the transfer of property; or
  • an order declaring an agreement unenforceable.

In addition, if the company is being wound up and the company has entered into a transaction that is:

  • an insolvent transaction and
  • a voidable transaction; and
  • has effect of discharging debt of related entity,

the liquidator can sue the related entity for the amount discharged (section 588FH of the Corporations Act).

(e) Invalid Circulating Security Interests

Under section 588FJ of the Corporations Act, a circulating security interest (equivalent to a floating charge) can be void as against a liquidator if it was created 6 months prior to Relation-back day or after that day and before the winding up began.

The circulating security interest created within that time period will be void against the company’s liquidator, except so far as it secures:

  • an advance paid to the company, or at its discretion, at or after that time as consideration for the circulating security interest, or
  • the amount of liability under a guarantee or other obligation undertaken at or after that time on behalf of, or for the benefit of, the company; or
  • an amount paid for services supplied to the company at or after that time; or
  • interest on an amount so payable.

A circulating security interest will not be void if the company was solvent immediately after granting the security interest.

(f) Other issues

  • Certain security interests under the Personal Property Securities Act 2009 (Cth) (“PPSA”) vest in a company if not registered in time (section 588FL of the Corporations Act); and
  • A security interest granted in favour of an officer of the company is void if enforcement steps are taken within 6 months of the interest being granted without leave of the Court (section 588FP of the Corporations Act).

2.3 Are any governmental approvals, consents or registrations (including exchange control approvals) required for guarantees or the enforcement of guarantees?

No.

2.4 Are any taxes, official charges or registration fees payable in connection with the grant of a guarantee?

No.

3 SECURITY

3.1 What documentation would constitute the fullest possible security in this jurisdiction?

The PPSA has rewritten security law in Australia, and changed many aspects of practice in relation to securities.

A general security agreement (“GSA”) (i.e. a single document granting general security interests over all assets) constitutes the fullest form of security that a company can provide. It is common for GSA’s to be in the form of a “combination security deed” which covers both general security over all assets, and includes specific security provisions relating to shares.

A GSA will cover all personal property, however if non-personal property is involved (real property is the most common example), separate security documents may be required. For land, that would be mortgages.

Figure 10: Australian security documents

Security Document

Type of Asset

Type of security

Commercial restrictions?

GSA

Interest in Personal Property located in Australia or if the grantor is an Australian entity.

General security interest over all assets

(i)

Under the PPSA, there are three ways of perfecting:

registration on the PPS register;

(iii)

possession by the secured party; or

(iv)

in the case of certain financial assets (including shares, bonds and certain accounts with Australian authorized deposit taking institutions) control by the secured party.

PPSR registration fee may vary.

As at 1 July 2015 the fees are as follows:

(i)

registration for up to 7 years costs A$6.80;

(v)

registration for more than 7 years up to 25 years costs A$34.00; and

(vi)

registration that has no stated end time costs A$119.00.

Real Property Mortgage

Interest in real property

Mortgage

Registration

If signed under Power of Attorney (“POA”), the POA needs registration.

Varies between the Australian states

3.2 Security interests in personal property

(a) Requirement to perfect a security interest

Under the PPSA (which does not apply to interests in land), a secured creditor with a perfected security interest (see below) has a security interest in the relevant collateral which has priority over other interests, can be enforced on insolvency and can be asserted against third parties.

The PPSA provides for perfection of a security interest in personal property by one of three means:

  • registration on the PPS register – this is the most common method of perfection;
  • in the case of chattels and other physical collateral, possession by the secured party; or
  • in the case of certain financial assets (including shares, bonds and certain accounts with Australian authorised deposit making institutions) control by the secured party.
  • If security interests governed by the PPSA are not perfected, then:
  • they vest in the grantor immediately upon the grantor entering voluntary administration, bankruptcy or liquidation;
  • a competing secured party may have a higher priority interest;
  • third parties may buy or lease the collateral free of the secured party’s interest.

(b) Enforcement rights

There is usually no requirement to obtain a judgment before exercising enforcement rights.

Enforcement rights may be set out in the security agreement. For example, a secured creditor generally has the right under the security agreement to enforce its security by appointing a receiver, or a receiver and manager.

In addition to this, the PPSA provides a statutory range of enforcement options which are in addition to any options agreed in the security agreement. Depending on the nature of the collateral, these include:

  • collection of liquid collateral (for example, as receivables);
  • seizure of assets;
  • disposal of collateral;
  • purchase of the collateral (or some of it) by the secured creditor following the giving of relevant notices and expiry of notice periods without objection; or
  • foreclosure (without the need for a court order), provided the secured debt is extinguished.

The PPSA enforcement provisions do not apply where a privately appointed receiver, receiver and manager or (in some situations) controller is realising assets of a corporate borrower or guarantor, and may otherwise be contracted out of in many instances.

Some statutes provide other remedies as well. Under the Corporations Act, a holder of a registered security over all, or substantially all, of a company’s assets can appoint a voluntary administrator.

3.3 Mortgages over land

State and Territory laws regulate real property mortgages. All such legislation provides for an implied power to sell an interest in land that is the subject of the mortgage. In most jurisdictions, a prescribed default notice must be served before the power of sale can be exercised. Enforcement does not, however, require an application to the court. The purchaser takes an interest in land free from all prior interests that rank below the secured creditor exercising the power of sale, and subject to certain limited interests that are protected by statute.

A secured creditor has two common enforcement options. It can either:

  • appoint a receiver in relation to the interest in land or rental income; or
  • enter into possession as mortgagee (including by appointment of an agent) and afterwards exercise a power of sale.

A mortgagee is not a fiduciary prior to the collection of proceeds. However, in most jurisdictions, a mortgagee must act in good faith when exercising the power of sale. This includes:

  • taking reasonable steps to determine the market value of the mortgaged property before selling it;
  • taking reasonable care to protect the property; or
  • obtaining the maximum sale price possible in the circumstances.

A mortgagor can restrain the sale where it can be shown that either:

  • the power of sale has not become exercisable.
  • the mortgagee is in breach of the duty to sell.

3.4 Is there any restriction on the type of lender benefit from the security mentioned above?

There is no restriction.

3.5 What is the hardening period for the various types of security mentioned above?

Same as for guarantees.

3.6 What ranks ahead of any of the categories of security mentioned above on insolvency or enforcement?

If the security is over the same property then, generally, it is the order in which the mortgage is created or the PPSA Security Interest is perfected. The rule is subject to a number of exceptions, the most common listed below:

(a) Security interests governed by the PPSA:

Requirement for continuous perfection of Security Interests under the PPSA.

Priority will be adversely affected if perfection is lost. A security interest which is subsequently re perfected will lose its original priority time and instead have a priority time arising on the subsequent re-perfection.

(b) Exceptions to the “order of perfection rule” in the PPSA

  • A security interest perfected by control ranks ahead of other security interests. One common example of this is that a security interest held by an Australian authorised deposit -taking institution over most accounts with it, will rank ahead of all other security interests with respect to those accounts, unless the institution agrees otherwise; and
  • Purchase money security interests, which usually involve acquisition financing or leases, also can rank ahead of earlier perfected security interests, provided they are registered as such within a certain time,
  • (a) and (b) apply whether or not the holder of the security interest had notice of the registered security interest or of any breach of the security agreement.

In addition, there are a number of circumstances in which a third party purchaser or lessee of collateral can take it free of a perfected security interest. These include (with certain exceptions) where the sale or lease is in the ordinary course of the grantor’s business unless the buyer or lessee actually knew it would breach the security agreement. In some circumstances, buyers and lessees can take free of security interests even where it was not in the ordinary course of a business and even where the buyer or lessee had notice of the security interest or a breach. For example, buyers or lessees of collateral which can be registered by its serial number (motor vehicles, aircraft and aircraft engines and water craft, and certain intellectual property) take free of perfected security interests that are not registered according to the serial number, even where the buyer knew of the security interest or any breach of the security agreement.

(a) Circulating security interests rank behind certain employee entitlements and other statutory charges

Under the Corporations Act, a circulating security interest includes a floating charge and a “circulating asset” under the PPSA. Under the PPSA there are two tests for whether an asset is circulating asset. Part 9.5 of the PPSA sets out when an asset will be circulating, broadly:

  • For certain assets (such as book debts and inventory), the secured party must control the asset and register that it has control in order to be non-circulating; and
  • For all other assets, the secured party must not have given the grantor express or implied authority to dispose of the assets in the ordinary course of the grantor’s business.

Under the Corporations Act, circulating security interests (such as receivables and inventory), where the secured creditor does not have control assets which the grantor is permitted to sell under the security agreement will rank behind certain statutory preferred creditors. These are employee entitlements, auditor’s fees, administrator’s indemnity for debts and remuneration, and other preferred creditors. Circulating security interests may also be void as against a liquidator in certain circumstances (see paragraph regarding section 588FJ of the Corporations Act, above).

3.7 Are any official taxes, charges or registration fees payable in connection with the taking or enforcement of security?

(a) Documentary taxes

As of 1 July 2016, none of the Australian states and territories no longer impose mortgage duty on security documents.

(b) Registration fees

The PPSR levies a nominal registration fee for each security document entered into by an Australian company or a registered foreign company (see above).

On the initiation of security enforcement proceedings, court filing fees are payable by the entity initiating proceedings.

(c) Notaries’ fees

Security documents do not require notarisation to be registered or enforced in Australian courts.

4 SYNDICATION AND SECURITY AGENCY

4.1 Is a security agency or trust recognized in the jurisdiction?

Yes.

(a) Agency

The concept of agency is recognised in Australia, provided that the extent of the agent’s authority is clearly delineated in the relevant authorisation.

Syndicated loan documentation usually contains comprehensive provisions outlining the scope of the facility agent’s capacity, authority and liability in its role as agent. Typically, those provisions limit the facility agent’s obligations to those set out in the finance documents. Such provisions will also provide that the facility agent does not act as trustee or have any fiduciary relationship with any other financier (except as expressly set out in the finance documents).

(b) Trust

Australia recognises trusts and they are very common in Australian financing arrangements.

A security trustee can enforce its rights in the Australian courts where it holds the security on trust for the financiers.

Lending to trustees of trusts is common practice, especially in the real estate investment trust (REIT) market. Lenders need to ensure the trustee has power under the constituent trust documents (such as the trust deed) to borrow and grant security. Lenders should also verify that the trustee’s indemnity out of trust property is not flawed. Trusts are not separate legal personalities but merely an equitable obligation imposed on the trustee.

4.2 If a security agency or trustee is not used what mechanism is commonly used to effect security which is syndicatable?

N/A.

4.3 If a syndicated loan is secured or guaranteed by an obligor in your jurisdiction, does any notification or perfection requirement exist in order to ensure the preservation of that guarantee or security in relation to a transfer of that loan?

The use of a security trustee to hold the benefit of the security and guarantee package on behalf of the syndicate (as described above) means that there are no notification or perfection requirements if membership of the syndicate changes from time to time. The security and guarantee package will continue to benefit the lenders, including new lenders joining the syndicate by way of novation.

5 OTHER MATERIAL CONSIDERATIONS

5.1 What other material limitations or considerations are there for a lender lending, or taking guarantees or security, in this jurisdiction?

Similar to the position under English law, there are several potential pitfalls when establishing a security and guarantee package. A few of them are as follows:

  • Circulating security interests (including floating charges and circulating assets under the PPSA): Some of the disadvantages of circulating security interests have been described above. It is worth noting that it can be difficult to establish fixed security over certain classes of asset, including cash and receivables, because the company granting security may be unwilling to cede sufficient control of those assets to the lender. If the company is permitted any freedom to deal with the assets, that may result in the security over them being treated as circulating rather than fixed.
  • Guarantees: Any change (other than one which is very minor) to the underlying transaction may result in a guarantee being void, unless the guarantor’s consent is obtained. Although most guarantees contain provisions requiring the guarantor to consent at the outset to a wide range of potential changes, those provisions may not always be effective. Generally an acknowledgment is obtained from the Guarantor that the Guarantee will continue to cover the new or amended facility.
  • Assignments: Contractual rights are typically assigned by way of security. Contractual rights that secure the payment or performance of an obligation are security interests under the PPSA. In order to perfect that security and obtain priority for the assignment, it is necessary to register the interest of the assignee. It is also necessary that the Assignor give notice of the assignment to the contract counterparty. This can be time consuming if there is a large number of contracts. The company granting security may also object to the process on the grounds that it can damage commercial relationships.